The country’s commercial banks are continuing to create their own exchange companies months after a massive crackdown on Pakistan’s currency market.
The latest in the list is Faysal Bank, which has inched closer towards launching its own exchange company. On January 17, 2024, Faysal Bank notified the Pakistan Stock Exchange (PSX) that it had received a ‘Certificate of Incorporation’ for its exchange company subsidiary.
This was the culmination of a process that began on September 28, 2023, when the bank announced its intention to set up a fully-owned exchange company with an initial capital of Rs 1 billion. The bank’s board of directors had given their approval for the project on September 27, 2023, subject to the clearance and approval of the State Bank of Pakistan (SBP) and the Securities and Exchange Commission of Pakistan (SECP), as per the bank’s filing on the PSX.
The bank crossed the first milestone when it obtained a no-objection certificate (NOC) from the SBP on November 1, 2023, for establishing an exchange company named ‘Faysal Islami Currency Exchange Company (Private) Limited’.
Previously, Meezan Bank received a certificate of incorporation from SECP for its exchange subsidiary, Meezan Exchange Company (Pvt.) Limited on November 14, 2023. Meezan Bank informed via PSX notification that it would submit an application to SBP for the issuance of a license to commence operations, as per the SBP Exchange Companies Manual.
Why are banks setting up exchange companies?
In early September, the SBP made a decisive move, signalling that it had had enough. It unfurled a sweeping set of reforms targeting exchange companies.
Under the new reforms, banks were asked to set up exchange companies. “Leading banks actively engaged in foreign exchange business will establish wholly owned Exchange Companies to cater to the legitimate foreign exchange needs of the general public,” read the press release.
A source disclosed to Profit that the SBP with the full force of the state had been involved in a crackdown on exchange companies. As such the top 10 banks were asked to open exchange companies. While the National Bank of Pakistan and Habib Bank already had exchange companies, Meezan Bank, Allied Bank, Habib Metropolitan Bank, Bank Alfalah, Faysal Bank, Askari Bank and Bank Al Habib were also ordered to set them up. The orders “came from the very top”, the source said.
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United Bank wasted no time in announcing its venture into the exchange company arena on September 12, six days after the reforms were rolled out. UBL’s move triggered a domino effect, with a lineup of other banks swiftly joining the fray. Meezan Bank joined the list three days later. In the following weeks, more banks followed suit which included MCB Bank, Bank A lHabib, Allied Bank, and Faysal Bank.
Reforms in the exchange companies sector
The primary objective of these reforms was tightening control over the open market and fortifying governance, internal controls, and compliance standards within the sector. The reforms came a little over a year after the SBP suspended the operations of several branches and franchises of exchange companies over regulatory violations. The central bank had launched a crackdown against exchange companies on apprehensions that they were not selling foreign currency to customers despite availability, leading to exchange rate volatility and a wide difference in rates offered in the interbank market and those quoted by the companies and commercial banks.
Previously, exchange companies in category A had a higher minimum capital requirement — Rs 20 crore — while those in category B had a lower minimum capital requirement of Rs 2.5 crore. The latter could only act as money changers.
Under the reforms, all exchange companies in categories A and B along with franchises of exchange companies were to be consolidated and transformed into a single category with a well-defined mandate.
The minimum capital requirement for exchange companies for category A was bumped up from Rs 20 crore to Rs 50 crore, free of losses.
Category B exchange companies were given three options: merge with an existing exchange company, upgrade to full exchange company status, or consolidate with other category B exchange companies to form a unified entity. They had to approach the SBP within one month for a NOC for one of these choices. After receiving the NOC, they had three months to meet regulatory and legal requirements for formal licensing, failing which, their licences would be cancelled.
Similarly, franchises of exchange companies were given two options: either merge with the franchiser exchange company or sell the franchise to it. They had one month to seek the approval of the central bank for the merger or sale. The failure to do so would result in cancellation of licenses.
